Libra: Facebook cryptocurrency emergence story
Mark Zuckerberg, the head of Meta (formerly Facebook), could not stay away from the rapid development of the crypto industry, thus deciding to create his own cryptocurrency. Despite high hopes and expectations, it turned out to be a big failure, followed by the government's rejection of the project's development. So why couldn't the world's largest social network create its own cryptocurrency? Let's explore this case closely.
Project start-up and main investors
On June 18, 2019, Facebook officially announced the start of testing its own virtual currency called Libra. Facebook CEO Mark Zuckerberg also revealed the news on his social networking account.
The developers stated that such cryptocurrency would provide access to various financial instruments to more than 1.7 billion people from developing countries and, at the same time, would improve the traditional financial system.
27 major international companies supported the project, including PayPal, eBay, Visa, MasterCard, Uber, Fartech, Spotify, Vodafone, and Lyft. It was supposed that the global launch of the cryptocurrency would start in early 2020, and in 2019, there would be full testing of the cryptocurrency.
The start-up fee for each participant was 10 million dollars, and the investing companies were to integrate Libra into their services, test the operation of transactions and assess the quality of using the new product. The developers intended to attract up to 100 partners by the end of 2020.
However, the New York Times reported that at least seven partner companies had signed a non-binding agreement with Facebook. They were allowed to avoid using and promoting the cryptocurrency in their activities, and they could leave the project at any time.
Neither at the start nor after the launch Libra could get the support of the four tech industry giants, namely, Google, Microsoft, Apple, and Amazon, as well as investment conglomerates such as JPMorgan and Goldman Sachs. It failed to involve any banks since financial institutions feared regulatory and logistical problems with the project.
Facebook positioned its virtual coin as a nonprofit currency since there was no fee, and it promised users a payment for conducting transactions with the digital asset.
Mark Zuckerberg's main idea was to issue his own internal currency, which could compete with real funds.
About Libra cryptocurrency
Libra is a stable cryptocurrency based on Libra Network's own blockchain and supported by a basket of financial assets: initially the U.S. dollar, the euro, the pound sterling, and the yen.
Technical aspects of Libra cryptocurrency:
- Blockchain - Libra Network public network;
- Libra BFT consensus mechanism, an all-in-one security solution for all participants in the network, while maintaining compatibility with other blockchains based on this consensus;
- Coin availability on cryptocurrency exchanges;
- Financial backing - at the expense of fiat currencies, combined in a basket of Libra Reserve;
- Smart-contract language - Move.
The main features of cryptocurrency:
- The project development under the Swiss Libra Association consortium;
- BFT consensus algorithm is used on the lower layer of the network to support smart contracts in the future;
- Introduction into the Facebook ecosystem, in particular the use of WhatsApp and FB Messenger to reach an audience of 2.5 billion users and attract them to conduct transactions;
- Positive impact on local and global markets, changing and improving financial and economic conditions.
In the mid-term, Facebook planned to strengthen its position in the market and even become a provider of source code services to be implemented in applications, websites, and e-commerce systems. Moreover, Mark Zuckerberg himself believed that the Libra cryptocurrency would boost the capitalization of the project by making it generally available to all categories of users.
In the long term, the following goals were set for the project's development:
- Changes in payment operations and the entire system caused by the emergence of a new type of players, which no longer allow banks to dominate and violate their status as the sole payment intermediary;
- The emergence of new financial services and the creation of innovative products for global access for all network users;
- Full monetary freedom and the removal of capital restrictions, since central banks can no longer slow down capital outflows and dictate strict rules for their monetary policy;
- The stage of de-dollarization - as Libra will gain worldwide popularity, there will be a new settlement system in global trade, thus reducing dependence on the U.S. dollar.
Libra cryptocurrency development team
The story of Mark Zuckerberg's cryptocurrency started when Facebook hired David Marcus, formerly president of PayPal. He headed the project, which involved people from Coinbase and other prominent experts. MIT professor Christian Catalini was appointed to the position of chief economist.
The total staff of cryptocurrency developers was about 100 people, and Facebook was constantly looking for new specialists in the blockchain field (up to 30 additional vacancies were posted). All work was performed in a separate building and was kept strictly secret until its official announcement.
Mark Zuckerberg was personally involved in the project, showing interest, and making some strategic decisions. For example, he chose the most expensive investment scenario for Libra, keeping in mind the principle of making the created cryptocurrency and money transfers with it as simple as sending a message via messenger.
The reaction of the U.S. Congress
The day the Facebook cryptocurrency was announced, the U.S. House of Representatives asked the developers to stop the project launch in order to hold a congressional hearing and evaluate the project at the state level. According to one of the officials, lawmakers should definitely become familiar with Libra, dismissing all rumors and speculation, and understand the unprecedented impact of cryptocurrency on the global financial system.
American authorities were worried about the emergence of such a virtual coin in the market since Facebook's audience was already more than 3 billion users in 2019. If at least a third of them started to use cryptocurrency actively, it would launch a revolution in the traditional finance system.
That was followed by direct statements saying that the development of the project should be completely stopped until the U.S. authorities fully understand and appreciate the intricacies of cryptocurrency. According to Steven Mnuchin, who was the head of the U.S. Treasury Department, Facebook's virtual coin could be used for money laundering or terrorist financing. The project was considered problematic and posed significant risks to national security.
During the Libra debate, the company was already implicated in several scandals related to information leaks of users, which contributed to the distrust of the cryptocurrency.
David Marcus, the project manager, spoke at an arranged congressional hearing and tried to convince members of parliament that there would be no cryptocurrency launch without government approval. Facebook CEO Mark Zuckerberg himself said he was ready to wait as long as it would take for U.S. authorities to verify the safety of his coin and grant approval for the product to existing.
In addition to rejection and non-acceptance within its own country, Facebook faced the fact that regulators of other states decided to check and evaluate the upcoming crypto project. The European Commission initiated an anonymous investigation regarding the Libra Association consortium. Already in early fall 2019, Yves Marsch, who served on the board of the European Central Bank, said that cryptocurrency could disrupt EU monetary policy and introduce negative changes to the regulator's control of the euro. Olaf Scholz, a former head of the German Finance Ministry, also spoke out against the launch of the Libra cryptocurrency.
The negative reaction of the U.S. government and criticism coming from other countries was obvious and logical. Mark Zuckerberg's innovation didn't sound like the ideas embraced by crypto enthusiasts who always wanted to create an alternative decentralized type of financial system. Libra raised many questions, as it had no decentralization, despite the blockchain use, and the issue of cryptocurrency regulation remained open. Facebook failed to give a clear answer about censorship and money supply control with the introduction of the new virtual coin.
The most acute issue was data privacy, as regulators had less and less confidence in Zuckerberg's company due to scandalous cases of user data leaks. There was even a flash mob among the Americans calling for the removal of Facebook.
When developers conceived it, the cryptocurrency Libra was supposed to make the life of Internet users easier by offering a single payment tool for making all online purchases. Mark Zuckerberg wanted to create an analog of PayPal, which would be much more convenient, accessible, and modern.
It is worth noting that PayPal, which made investments in the project's development, left the partnership already in mid-autumn 2019. Before the end of the year, other investors also left the project, including Visa and MasterCard.
Rebranding: how Libra became Diem
The government rejection made it impossible to develop the project, so all plans of launching Libra were halted at that point. Libra Association had been rapidly collapsing as members and investors were quickly abandoning the project.
At the same time, Facebook intended to present to the world several stablecoins, which are secured by the dollar, euro, pound sterling, and the Singapore dollar.
At the end of spring 2020, the rebranding of the Calibra cryptocurrency wallet, designed to store virtual coins, turned it into Novi. The developers aimed to show that Libra is not solely owned by Facebook but is becoming an independent unit. By the end of the year, a new structure of the Diem Association appeared, and the cryptocurrency itself got a new name - Diem. However, the coin did not appear on the market with the advent of 2021.
Silvergate bought out the Diem project for $200 million, and in the mid-fall of 2021, Facebook started a new page of its history as Meta, while David Marcus stepped down as head of the cryptocurrency development team.
Negative rhetoric and skepticism of the U.S. authorities were key obstacles to the Libra launch and development. It became evident that no one would allow the project to operate and revolutionize the traditional financial system. The project acted as a full-fledged antagonist to the classic financial institutions and payment structures, and the U.S. Congress and the European Commission investigation made it clear that the territory of central banks is sacrosanct.
In addition, Facebook lost its credibility and not only American authorities expressed dissatisfaction with its activities. The huge IT corporation manages a huge number of resources and now declares its intention to launch its own payment system, bypassing traditional finance.
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